What fiscal cliff? Spending up for holiday season

Although tax hikes and cuts in federal spending are on the horizon, people are not worried about that as they buy Christmas gifts this year. (Source: MGN/Stacy Proebstl)

(RNN) – Apparently, most people will wait until after the holidays to worry about what imminent tax hikes will do their bank accounts.

On average, people still plan to spend more on Christmas presents than they did last year, and there is an increase of people who will spend at least $1,000.

Gallup conducted a poll one week after President Obama's re-election that revealed consumers would spend an average of $770 on Christmas gifts, and overall spending would increase between 3.5 percent and 3.7 percent from this time last year.

Gallup's projections showed a slight increase from the National Retail Federation's predicted average spending for individual buyers, released in October. The NRF showed that people would spend an average of about $750, including gifts, decorations, greeting cards and other related items.

Those are modest gains compared with average holiday spending during the last decade, but it proves fears about the "fiscal cliff" are moot until after all the wrapping and ribbon has been removed from boxes.

That's because the overall situation of the economy has boosted people's confidence and loosened their grip on their wallets.

"There have been a lot of signs in the economy over the last four or five months that things are picking up," said John Easterwood, associate professor of finance at Virginia Tech University. "Housing prices are going up. When things start to do well in the economy, people become more confident and more willing to spend."

A better buying market for houses, more home construction, improved performance in the stock market and an unemployment rate that, although still high, is two points lower than three years ago explains healthy consumer spending, Easterwood explained.

Nielsen also released positive spending forecasts for this season, and according to Nielsen Vice President James Russo, spending in five key areas other than gifts will increase because people will be less prone to stick to lists.

Spending on food, beverages, alcohol, health/beauty and homecare is expected to rise more than 2 percent from last year and top $98 billion.

"Overall, this could be a season to celebrate," Russo said. "Nielsen's Consumer Confidence Index is the highest since before the recession. Planned shopping list usage is down, so impulse buying could be up, and shoppers across the income spectrum say they plan to spend more in multiple areas."

The financial turmoil that would result from automatic tax increases and federal spending cuts – otherwise known as the fiscal cliff – is set to begin in January if the White House and Congress do not work out a deal.

Laws that would automatically go into effect mean $560 billion more in combined taxes and reduced spending.

The measures were designed to slash deeply into the national deficit, but the Congressional Budget Office believes it would result in another recession.

"What you can think of is there is a demand for goods and services – some from households, some from businesses and some from various levels of government," said Easterwood. "If you take a component of that, government spending, and cut it, that will reduce the overall demand for goods and services. The problem with the way this is set up is that it's across the board. Road construction, prison maintenance – most things in the budget are affected."

Individual households would be affected in a similar way, although not immediately. Even though people are spending at a healthy rate now, the effect in their paychecks if a deal is not worked out could start to stall the economy over the first month or two in 2013.

The average family will see $2,000 less in income next year if both sides do not sign off on a deal, according to President Barack Obama.

As the deadline to resolve the issue quickly approaches, Americans are just as divided as politicians about issues that have held up negotiations.

Quinnipiac University conducted a national survey showing 65 percent of registered voters support higher taxes on the wealthy. However, 53 percent of Republican respondents were opposed.

Surveys conducted by the Washington Post/Pew Research Center and CNN/ORC International each revealed that the vast majority of people would blame Republicans if Congress does not get a new deal done.

That mirrors the results of the November presidential election, which Obama won in a landslide despite predictions that it would be one of the closest in recent memory.

Republicans called one recent proposal from the White House a joke, while Obama was adamant he would not sign a law that did not include higher taxes on the top "2 percent" – people who earn $250,000 or more per year.

That issue seems to have been resolved, but there is still a major gap on several other issues, including the amount of new federal revenue to include in the proposal.

"One thing Republicans won't be party to is a deal that protects big businesses and preserves special-interest tax breaks while raising tax rates on the small businesses we're counting on to create jobs," House Speaker John Boehner, R-OH, said in a statement. "We need to solve this problem."

The negotiations to stop the country from jumping off the so-called "fiscal cliff" can sometimes be confusing. This slideshow features some of the major players in the ongoing efforts to steer clear of the cliff.

The negotiations to stop the country from jumping off the so-called "fiscal cliff" can sometimes be confusing. This slideshow features some of the major players in the ongoing efforts to steer clear of the cliff.

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